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Wednesday, June 12, 2013

How to Rob a Bank

"The best way to rob a bank is to own
one.” –Niall
Ferguson, The Ascent of Money

New Lisbon WI
– As I recall, Robert Kiyosaki, in his
bestselling book Rich Dad, Poor Dad,
recounts a story from his childhood. He was told he needed to make money. So he
and a friend collected aluminum toothpaste containers to cut nickels out of. An
adult had to explain to Kiyosaki that he could not make his own money.

Money implies trust. Trust that the one who issued it will
back it; trust that the one whose goods you want will accept the money as
currency. That is why we do not all have our own system of money, because
nobody trusts us.

When we take our money to the bank, we trust the bank to hold
our deposit, and we trust that that deposit will be there when we want it. Many
think their money is held in the bank. It is not, it is loaned out, and that is
why we make interest on it. However, more money is loaned than exists, this is
known as fractional reserve banking, and that is why we have bank runs.

To use a simple Harvard money game:

Suppose you put 100 $ in the bank. To make it easy, we will
also suppose that they are required to hold a 10th of your deposit
in their vaults. Thus another 90 $ can be loaned out. The person who takes this
loan will put it in the bank, or they will spend it and the company will put it
in the bank. However, the 90 $ in the bank is loaned out again, this time 81
dollars because they must also hold a 10th of this new deposit. By
the time the third bank lends out the money, 271 $ are in circulation, when in
reality only 100 $ exists-yours.

Suppose, for some reason, you want to draw out that money. To
pay you back, the bank has to call in the 90 $ loan. But since that money was
also lent out, the third bank must call in the 81 $ loan, assuming it goes no
farther, two banks at least will either have to default or pay out, causing
bankruptcy for their clients. That is why bank runs happen, because everybody
wants their money before somebody else gets it. The only way to keep it all
running is to be sure not everybody wants their money at the same time.

The government, having promised loan security, must pay the
depositors whose money never existed, who had deposited pre-lent money. To do
this the government must print more money. When there is too much money
everybody knows what happens, simply, we lost our trust. Since trust it the
only thing it is all built on, the best way to rob a bank is make it lose its
trust by over lending. The only way to over lend, is if you own the bank. So
the best way to rob a bank is to own one. But you are not just robbing one
bank, you are robbing all of them of their trust. That is a recipe for a Great
Depression.